RBA keeps interest rates at 4.35% at first meeting of 2024

• The RBA leaves rates unchanged at 4.35% for the second consecutive meeting.
• The statement from the Reserve Bank of Australia highlights that although inflation continued to decline, it remains high.
• The RBA does not rule out a further interest rate increase.

The Reserve Bank of Australia (RBA) has decided not to change its interest rates from 4.35% in the first monetary policy meeting of 2024. This is the second consecutive meeting without changes in rates, after a last increase was made last November. In its statement, the RBA highlighted that inflation continues to moderate but remains high.

RBA statement

Inflation continued to decline in the October-December quarter. Despite this progress, inflation remains high, 4.1%. Goods price inflation was lower than the RBA's November forecasts. It has continued to decline, reflecting the resolution of earlier disruptions in the global supply chain and a moderation in domestic demand for goods. However, services price inflation declined at a more gradual pace, in line with previous RBA forecasts, and remains high. This is consistent with continued excess demand in the economy and strong internal pressures on costs of both labor and non-labor inputs.

Higher interest rates are working to establish a more sustainable balance between aggregate demand and supply in the economy. Consequently, conditions in the labor market continue to gradually improve, although they remain tighter than is consistent with the goals of full employment and sustained inflation. Wage growth has picked up, but is not expected to rise much further and remains consistent with the inflation target, assuming productivity growth rises to around its long-term average. Inflation continues to weigh on people's real incomes and household consumption growth is weak, as is housing investment.

Outlook remains very uncertain

While there are encouraging signs, the economic outlook is uncertain and the Board remains very attentive to inflation risks. Central forecasts point to inflation returning to the target range of 2% to 3% in 2025 and to the midpoint in 2026. Service price inflation is expected to gradually decline as demand moderates and the growth of labor and non-labor costs is attenuated. Employment is expected to continue to grow moderately and the unemployment rate and the broader rate of underutilization are expected to rise somewhat further.

While there have been favorable signs about goods price inflation overseas, service price inflation has remained persistent and the same could be true in Australia. A high level of uncertainty also remains around the prospects for the Chinese economy and the implications of the conflicts in Ukraine and the Middle East. Domestically, there are uncertainties regarding lags in the effect of monetary policy and how companies' pricing and wage-setting decisions will respond to slower growth in the economy at a time of excess demand and while the labor market remains tight. The outlook for household consumption also remains uncertain.

The priority is to return inflation to the target

Re-achieving the inflation target within a reasonable time frame remains the Board's top priority. This is consistent with the RBA's mandate of price stability and full employment. The Board must be confident that inflation is moving sustainably towards the target range. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

While recent data indicates that inflation is declining, it remains high. The Board expects that it will be some time before inflation is sustainably within the target range. The path of interest rates that best ensures that inflation returns to its target within a reasonable time will depend on the data and the evolution of the risk assessment, and a further increase in interest rates cannot be ruled out. The Board will continue to pay close attention to developments in the global economy, domestic demand trends, and inflation and labor market prospects. The Board remains steadfast in its determination to return inflation to its target and will do whatever is necessary to achieve that result.